Transcript Strategic Alliance Termination

Patent and Know-How
Licensing
The Essential IP Package
D. Patrick O’Reilley
IP Licensing & Litigation Seminar
Taiwan, November 2004
© 2004
TYPES OF LICENSES
• Express License
• Exclusive - Nonexclusive
–
•
•
•
•
Covenant Not to Sue
Field of Use
Cross License
Sublicense
Have Made and Have Sold
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EXPRESS LICENSES
• Written or Oral
–
–
–
Patent, Patent Application, Invention
Made
Formal Written Contract
Informal -- Exchange of
Correspondence

–
Negotiation, MOU, Heads of Agreement
Oral If Terms Provable


Partial Performance
Acceptance of Payment
3
EXCLUSIVE LICENSE
• May Be an Assignment
–
All Substantial Rights
• May Be an Asset Transfer
–
Hart-Scott-Rodino Filing



–
$50,000,000 value (adjustable yearly by GDP)
Size of businesses if value < $200,000,000
Filing fee $45,000 and up, varies with value
Penalty for Not Filing

$10,000 per day
4
EXCLUSIVE LICENSE
• Agreement not to grant further licenses
–
There may be preexisting nonexclusive licenses
 Western Electric v. Pacent, 42 F2d 116
 Hill Phoenix v. Systematic Refrig. 117
F.Supp.2d 508
• Agreement not to practice under patent
–
Reservation of right -- sole license
• May be limited in time, territory & field
• Exclusive licensee may sue for infringement
–
–
Can compel joinder of Licensor
Though implied, better to specify terms
 Control of litigation
 Share of costs and recovery
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EXCLUSIVE LICENSE
• Possible Antitrust Consequences
–
–
–
Restriction of Sublicenses
Field of Use Division of Markets
Acquisition of Asset
• Implied Obligation to Exploit
–
–
–
Best Efforts Provisions
Minimum Annual Royalty
Disclaimer of Obligation
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NONEXCLUSIVE LICENSE
• Simply a Promise Not to Sue for What
Would Otherwise be Infringement
–
Mallinckrodt v. Medipart, 976 F.2d at 707
n.6
• Licensee Gets No Protection From
Unlicensed Competition (absent
contractual protection)
–
Western Electric v. Pacent, 42 F2d 116
• Licensor May Grant Other Licenses
• Implied Representation of Power to
Grant
• Runs With Patent (“Lien”)
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COVENANT NOT TO SUE
• Personal Promise
–
May Not Run With Patent on Sale
• No Implied Representations
• But, is it a License?
–
Infringement is exploitation “without
authority”

–
35 U.S.C. §271(a)
“Implicit in right to exclude is the right
to waive that right.”

Prima-Tec v. A-Roo, 222 F.3d 1372
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COVENANT NOT TO SUE I
• But, is it a License?
–
Hilgraeve v. Symantec, 265 F.3d 1336

–
“The covenant not to sue … does not
grant a transferable license to the
patent.”
AT&T v. Radio Audion, 281 F. 200


After granting exclusive license, patent
owner granted covenant not to sue.
Held, patent owner did not have power
to grant covenant and covenant “is in
legal effect a license”
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COVENANT NOT TO SUE II
• Does sale of patented product by
covenantee exhaust patent rights?
–
Is sale authorized by patent owner?
• Would patent owner be estopped from
suing covenantee’s customers?
–
If patent owner knows other party will
continue to make and sell patented
products, is there intent to grant rights
under the patent to other party’s
customers?
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COVENANT NOT TO SUE III
• Suggest any agreement granting
covenant not to sue expressly address
scope
–
–
Patent owner reserves right to sue
customers
Patent-related scope vs. productrelated scope

3M v. Barton Nelson, 2003 WL 22989077
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FIELD OF USE LICENSE
• Where a patented invention has
different uses, such uses may be
separately licensed
• License restricted to particular uses is
legal
–
–
General Talking Pictures v. Western
Electric, 305 U.S. 124 (1938)
Practice outside the licensed field is
infringement of the licensed patent
12
FIELD OF USE LICENSE II
• Divide Licensed Technology Among
Fields
–
Market, Size, Uses, Applications



–
–
–
Motor - Car, Plane, Boat
Sound System - Broadcast, Theater,
Home
Fabric - Bolt, Garment, Dyed
Requires Specific Definition of Field
May be Exclusive
May Have Antitrust Consequences

Intentional Restraint of Normal
Competition
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CROSS LICENSE
• Exchange Technology
–
–
Blocking Patent
Need Not Be the Same Technology
• Consideration May Be More Than
License
• May Present Antitrust Consequences
–
–
Where Parties Agree to Consult Before
Granting Further Licenses
Patent Pools Combining Most of
Technology
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The Nature of Sublicenses
Patent Owner
Licensor
License Agreement
Licensee
Sublicense Agreement
Sublicensee
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Sublicensing Fundamentals
• Licensor appoints licensee as agent for
granting further licenses
–
–
Federal Labs v. Comm’r, 8 T.C. 1150
(agency)
See Simmen Automatic v. General
Railway, 72 F.2d 232 (right to grant
sublicense is power of attorney granted
to licensee)
• Right to grant sublicenses must be
expressly granted
–
Providence Rubber v. Goodyear, 76 U.S.
788
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Scope of Authority
• Terms of license agreement determines
scope of licensee’s authority to grant
sublicenses
–
–
–
Cutter v. Lyophile-Cryochem, 179 F.2d 80;
Imperial Appliance v. Hamilton, 239 F.Supp 175
Sublicense cannot be less restrictive than
license
 License royalty - 5%, sublicense royalty - 5%+
 License territory - U.S., sublicense territory U.S. or less
Better to specify terms for sublicenses


Up-front payment or minimums required?
Can sublicensee grant further sublicenses?
17
Enforcement of Sublicense
• Sublicense is contract between licensee
and sublicensee
–
Can licensor enforce sublicense contract?
 See Hazeltine Research v. FreedEisemann, 3 F.2d 172
 Depending on terms, licensor may be
third party beneficiary
 Under agency theory, disclosed or
partially disclosed principal is party to
contract between agent and third party

Mere fact it is sublicense partially
discloses existence of principal
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Continuation of Sublicense
• Without contrary terms, sublicense will
continue after termination of the license
agreement or other revocation of the
power to grant
–
–
–
Licensor becomes a party to the
sublicense agreement
All transactions properly performed by
agent remain in effect
But, not so if license rescinded for fraud

Rhone-Poulenc v. DeKalb, 284 F3d 1323
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LICENSE TO HAVE MADE
• Unrestricted license to make and use or
sell, implies authority to have others
supply what may be lawfully used or
sold
–
Westinghouse v. Tri-City Radio, 23 F.2d
628; Carey v. United States, 326 F.2d 975
• Since a license to make always implies
use or sell, right to have made is implied
from right to make and must be
specifically excluded
–
"But Not Have Made"
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LICENSE TO HAVE MADE II
• Not a Sublicense
–
Have Made = Subcontract

Subcontractor Cannot Act Independently

See, Cyrix v. SGS Thompson, 77 F.3d
1381
» Test: For whom is the product being
made?


Carey v. United States, 326 F.2d 975
But see, Westinghouse v. Tri-City, supra;
DuPont v. Shell, 227 USPQ 233

Sham exercise of “have made” to avoid
sublicense restriction
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RIGHT TO “HAVE SOLD”
• Licensee with right to sell may use
distributor for re-sale of licensed
product
–
–
Lisle v. Edwards, 777 F.2d 693
Velos v. Centocor, 1996 US Dist LEXIS
19743


–
Resale by exclusive distributor is not
sublicense
Licensed product was sold by licensee to
distributor
Cook v. Boston Scientific, 208 F
Supp.2d 874

Specific contract term addressing
“distribution” precluded implied right to
“have sold”
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Essential License Terms
• Grant provision
• Consideration provisions
–
–
–
Fees
Royalties
Payments
• Termination
• Risk control
–
–
Warranties
Indemnification
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THE GRANT CLAUSE
• Licensor "Grants" to Licensee
–
Agrees to grant
• Subsidiaries, Affiliates, Controlled
Company
–
Definitions

Include temporal limitation

–
–
Otherwise licensed subsidiary may retain
license after it is sold
Pierce Corporate Veil For Obligations
Performance Obligations Met by Subs
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THE GRANT CLAUSE II
• Character of License
–
–
Exclusive, Nonexclusive
"Irrevocable, indivisible, nontransferable"


Inherent Ambiguity
Use Other Terms of Agreement
• If appropriate, expressly include right
to grant sublicenses
–
May expressly exclude, but not
necessary in most cases
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THE GRANT CLAUSE III
• Under what
–
–
Licensed Patents – defined term usually
Know-how, technical information -defined
• To Make, Use, Sell, Offer for Sale,
Import
–
–
Separable rights
Expressly exclude implied right to “Have
Made” or “Have Sold”

–
May expressly include
May address “Otherwise Dispose Of”


Addresses sale vs. lease
When granting all rights, merely cosmetic26
THE GRANT CLAUSE IV
• Geographic Scope of License Grant
–
Not Implied from Patent Grant

–
Hattori v. Refac, 9 USPQ2d 1046 (“within
the scope” defines product not territory)
Use Licensed Territory defined term


Make, Use and Sell Territories
Know-How Territory
• The Term of the Grant
–
–
Provision of the Agreement
Implied Life of Patents
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FORMS OF
LICENSE CONSIDERATION
• Lump Sum Payment
–
–
Paid-up License
Time Payments

Acceleration Provision
• License Fee
–
–
Not Creditable - Compensation for Costs
Creditable - Initial Investment Incentive
• Annual Lump Sum Payments
• Royalties -- Rate Times Base
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SELECTION OF A ROYALTY BASE
• Vary With Use of Licensed Technology
• Provide for Easy Accounting/Auditing
• Avoid Bases of Controversy
–
Cost of Products or Net or Gross Profit


–
Creative Accounting
Proprietary Information
Cost of Raw Material

Commodity Market Fluctuation - OPEC
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SELECTION OF A ROYALTY BASE II
• Consider Patent Claim Scope
–
–
Product Sold
Process Used

–
Product Made Using Patented Process
Claim to a Combination

Zenith v. Universal, 846 F.Supp. 641
• Base May Be Broader Than Claim
–
If Voluntary or Negotiated
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SELECTION OF A ROYALTY BASE III
• Base for Process or Product Not Sold
–
Volume of Raw Material

–
Production Volume


–
Often Appropriate for Process License
Cycles of Equipment, Volume of Product
Used Where Product is Intermediate or
Subcomponent
Not Inflation Sensitive

Requires Escalation Provision
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SELECTION OF A ROYALTY BASE IV
• Net or Gross Sales Price
–
–
–
Invoice & Other Records Routinely Kept
Directly Related to Use of Technology
Inflation Sensitive
32
REACH-THROUGH LICENSE
• Reach-through licenses tie royalties to
sales of products that are identified,
but not manufactured through the use
of the patented product
–
Time shift - Computes royalties as a
share of the ultimate market value (true
value) of some future commercial
product to be developed with the
patented product, rather than its
current market value
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WHY USE REACH-THROUGH?
• Useful in technologies where use is
difficult to police, i.e., biotech research
tools
• From the Licensee’s Perspective:
–
–
Permits users with limited funds to use patented
technology and defer payments until the use yields
commercial results
Likely to accept reach-through royalties only if the
tool is directly linked to the end product or service
• From the Licensor’s Perspective:
–
–
Potential for an enhanced royalty income
Chance at larger payoffs from sales of downstream
products rather than certain, but smaller, upfront 34fees
NO PATENT MISUSE ISSUE
• Bayer v. Housey, 228 F. Supp.2d 467, aff’d on
other grounds, 340 F3d 1367
–
–
“If the license agreement is for the convenience of
the parties in measuring the value of the license, then
the agreement cannot constitute patent misuse.”
Conditioning depends on “the voluntariness of the
licensee’s agreement to the royalty provisions.”
Time shifting of payments is not a per se violation “[T]he royalties to be paid after the expiration of the
patent are for the use of the subject invention prior to
the expiration of the patent. Royalties are collected
based on later pharmaceutical sales, but the royalties
are being accrued as the invention is practiced during
the research phase.”
• See Integra Life v. Merck, 331 F3d 860 (factor in
“hypothetical negotiation” for damages); Sibia
Neurosciences v. Cadus Pharmaceutical, 225
F3d 1349
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REACH-THROUGH OPTIONS
• Option A
–
–
–
Initial payment $10,000
1% royalty for the life of patents on sales of
products directly or indirectly discovered or
developed, using the licensed method
Royalty payable on sales for the life of any
patents covering the discovered products or, if
not patented, for ten years from first sale of
discovered product
• Option B
–
–
Lump sum, non-exclusive license where the
lump sum is 5% of the licensee’s R&D budget
No reach-through royalty
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ROYALTY DEFINITIONS IMPORTANT
• Net Sales Price
–
Usually Invoice Price, FOB Licensee,
Less Freight, Insurance, Taxes,
Packaging, Discounts Actually Given


Usually a Standard in Industry
Separately Stated on Invoice
• When Sale Occurs
–
Invoice, Shipment, Payment Whichever First
37
PROVIDE FOR VARIOUS CHANNELS OF
TRADE
• Different Levels of Value Added
–
–
Use of Trading Company
Sale in Bulk Form or Value-added Form
• Consider Sales to Related Companies
–
Arms Length Transaction

–
Allen Archery v. Browning, 898 F.2d 787
Provide Means to Determine Market Price
• Other Dispositions
–
Leased, Given Away, Used by Licensee
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ESCALATION PROVISION
• Specify Index -- Consumer Price Index
• Specify Subtitle -- All Urban
Consumers
• Specify Category and Subcategory
• Specify Geographic Scope
• Specify Base Period
–
Month of Execution or Other
• Confirm All Items Published for Base
Period
39
ESCALATION PROVISION II
• Compare Index of Base Month with
Specified Month of Each Year
• Adjust Initial Royalty Rate by
Percentage Difference
–
Initial Rate = $10 per, Base 1982-84 = 100,
Current Index = $144, Percent Change
44%, New Rate = (1.44 x 10) = $14.40
• May Negotiate Equalization Factor
–
To Limit Effect to Less Than All, e.g., 80%
40
ROYALTIES AS INCENTIVES
• Minimum Annual Royalties
–
–
–
–
–
Minimum Return to Licensor
Required to Maintain License or
Exclusive
May Be Advance Minimums
May Increase Over Time to Encourage
Effort
Related Company Sales
• Variable Royalties
–
–
Royalty Rate Inverse to Production
Volume
Royalty Rate Direct to Profit Margin
41
ROYALTY REPORTING & ACCOUNTING
PROVISIONS
• Record Keeping
–
L'ee Obliged to Keep Records
"Sufficient" to Permit Determination of
Royalty Due



May Specify Detail
May Limit Retention Period
May Specify Location
42
ROYALTY REPORTING & ACCOUNTING
PROVISIONS II
• Auditing of Records
–
Licensor Entitled to Audit

–
Normally at Licensor's Expense

–
–
If underpayment, Licensee's Expense
Competitors or Confidential Information

–
May Limit Frequency, Location & Time
Appoint Mutually Acceptable CPA
Failure to Audit May Be Waiver of
Objection
Post-Termination Audit
43
ROYALTY REPORTING & ACCOUNTING
PROVISIONS III
• Reports by Licensee of Royalties Due
–
Content Negotiable But Specified


–
Periodic, Preferably on Calendar Basis

–
–
Summary of Royalties Due
How Determined
Within 30 Days After Close of Quarter
Specify Payment at Time of Report
Post-Termination Report
44
ROYALTIES FOR LICENSED PATENT
APPLICATIONS
• Patent Applications Provide No
Exclusivity
–
Trade Secret - But Reverse Engineer

–
Destroyed by Publication of Application
Option For License Under Issued Patent
• Royalty Base May Be Different
–
–
Product Disclosed or Disclosed &
Claimed
Product Without Reference to
Application
• Limit Royalty to Term of Years
–
Royalties Resume on Issuance
45
TERM & TERMINATION
• Absent Term - Life of Patents
• Termination on Breach
–
–
–
Material Breach Only to Heart of
Agreement
Notice and Cure Period
Automatic vs. Second Notice

Bankruptcy Benefit
• Licensee Termination Without Cause
–
Minimum Annual Royalty
46
TERM & TERMINATION II
• Specify Effects on Termination
–
–
–
–
–
–
Accrued Royalties, Reporting, Auditing
Disposition of Licensed Products Onhand
Confidentiality Provisions
Status of Sublicenses
Rights to Know-how/Trade Secrets
Causes of Action Under the Agreement
47
REPRESENTATIONS AND WARRANTIES
• Implied in Nonexclusive License
–
–
–
Licensor Has Power to Grant License
Licensor Has Not Taken Action
Inconsistent
Licensor Will Not Take Action Inconsistent
• Additionally Implied in Exclusive
License
–
–
–
Licensor Has Title to Patent
Licensor Will Grant No Further Licenses
Licensor Will Not Practice Under Patent
• Implied From Facts
48
REPRESENTATIONS AND WARRANTIES II
• Licensor specifically disclaim
implications
–
–
–
–
–
–
Validity or scope of licensed patents
Noninfringement of third party patents
Commercial utility, merchantability, fitness
To furnish know-how, technical information
Use of licensor's name or trade name
License under any other licensor patents
• In nonexclusive license, disclaim
maintenance
• Licensee disclaim obligation to exploit
• Mutual general disclaimer
49
REPRESENTATIONS AND WARRANTIES III
• If Either Party To Provide Improvements
–
Represent Employees Obligated to
Assign
• Representation of Validity/Enforceability
–
L'or Not Aware of Any Basis

Careful if L'or Large Company
• Representation of Noninfringement
–
–
L'or Not Aware of Any Claims
Infringement Indemnity Clause
50
INDEMNITY FROM TORT LIABILITY
• Protection for Licensor
–
–
Damage Arising from Use of Licensed
Know-how
Damage Arising from Use or Sale of
Licensed Products or Processes


–
–
No Substantial Precedent Except for
Trademarks
Preclude Use of Licensor's Name/Mark
Include Defend and Indemnify
Licensee to Maintain Liability Insurance
51
THIRD PARTY INFRINGEMENT
INDEMNIFICATION
• Protection For Licensee (Exclusive or
Non)
–
–
Licensor to Defend & Indemnify
More Often in Know-How Agreements
• Licensor should avoid – high risk
–
Never assume liability greater than
benefit
52
THIRD PARTY INFRINGEMENT
INDEMNIFICATION CLAUSE
• Conditions Precedent to Obligation
–
–
–
–
Notice of Claim or Suit
Patent Issued Before Specified Date
Prior Approval of Accused Products
Licensor Control Suit/Settlement
• Limit on Licensor's Liability
–
Portion of Payments Received as of
Date of Judgment
53
THIRD PARTY INFRINGEMENT
INDEMNIFICATION CLAUSE II
• Limit to Settlement Authority
–
–
–
–
No Adverse Effect on Licensee
Settlement is Prospective License to
L'ee
Provide For Credit Against Future
Royalties
Establish Minimum
54
For More Information
D. Patrick O’Reilley
Finnegan, Henderson,
Farabow, Garrett & Dunner LLP
Washington
202.408.4100
Email: Pat.O'[email protected]
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